3-Fund Portfolio Post

On an Instagram post dated 19 Jan 2020, Mr. Schneider suggested a 3-fund portfolio consisting of 54% VTSAX, 36% VTIAX and 10% VBTLX.

For young investors like me it is advisable to be 100% in equities, at least up to 3-5 years before retirement when you should move some of your position to bonds, but if we were to exclude the 10% allocation to VBTLX, the portfolio would look like this: 60% VTSAX and 40% VTIAX.

Now, considering that VTIAX is 0% USA (Thank, Jeremy, for clarifying this on your DM), the portfolio would have a 60% US exposure.

In a cap-weighted total-world all-markets index fund, the US is represented by 56.7%.

If this is the case, wouldn’t be indicated for an investor to choose just one index fund such as VTWAX that is market cap-weighted and does the job for you, without the need to set up an arbitrary percentage of US stocks (60% in the case above)?

As an EU investor, I am lucky enough that Vanguard decided to launch in 2019 an ETF that does just that: track the FTSE All-World index - a total world market cap fund - just like VTWAX. Before that, I was investing only in an S&P 500 ETF, but I am slowly moving into a All-World allocation.

My final questions are:

  1. Should we be 100% in US equities, 56.7% according to a World Market Cap percentage, or somewhere in between (as Jack Bogle suggested in 2017 - 80% US equities)?

  2. A young investor should own a bond index fund, considering that the best long term outcome is being exposed to 100% equities?

  3. Do valuations matter? At the moment, the US market is trading at a P/E of 25.3, but ex-US markets have a P/E of 16.3. This may be a good argument for a cap-weighted all-world diversification that still has a P/E of 20.6.

  4. Do you believe in the value premium of small-cap stocks, and recommend investors to hold something like VSIAX ?

Thank you!

I don’t know. There’s smart people on all sides of that argument. As a non-US investor, I think going purely on world market cap weighted makes the most sense as there’s no “home country bias”. But getting this exactly right isn’t a big deal. Pick something and stick with it. Focus on putting more money in.

Again, it’s a close call. Some data suggests owning a small portion of bonds can actually outperform 100% equities based on the volatility of the two asset classes and the benefit of diversification. If you wanted to go 100% equities, I would support that too. Pick one and stick with it.

I would say no. The market knows more than you or I or any individual The higher P/E of the US represents expectations of higher future growth (because the US has super fast growth tech companies like Tesla, Apple, Amazon, Netflix, etc, etc). I wouldn’t try to outsmart the market. Going with a market cap weighted index fund is wise.

Maybe! I actually do slightly overweight small cap in my own portfolio, but it has actually underperformed since I did that. I think Jack Bogle would be against it and claim you’re just opening yourself up to underperformance if you pick sectors (as I have experienced). But other smart people point out over long periods of time small cap stocks tend to outperform. But will that happen in the future? I don’t know.

TL;DR: Sounds like 100% VTWAX would be a good strategy for you :slight_smile:

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